Looking at the price behavior in the financial markets, investors seem to hope that the pandemic, which has brought almost 1.5 million victims worldwide, will finally be under control, which may have triggered an increased appetite for risk in the currency market, which may involve a USD sell-off.
The dollar index fell on Thursday to 90,948, the lowest in two and a half years. Similarly, the exchange rate of the main currency pair EUR/USD has already increased above 1.2100, which is the highest level since April 2018. According to Morgan Stanley, currency investors are taking more risk after the recent breakthrough news on COVID-19 vaccines. Additionally, the risk appetite seems to fuel hopes for a fiscal support package in the US. According to the latest news, House Speaker Nancy Pelosi and the leader of the Democratic Party in the Senate Chuck Shummer support a fiscal stimulus package worth USD 908 billion as a basis for a new round of negotiations.
The cheaper dollar could also help gold and silver buyers this week. The price of yellow metal seems to have risen by more than 80 USD per ounce in the last three days alone. Thus, the price is back to 1850 USD. The situation on the gold market was very interesting last week, because as the price dropped we got record high capital outflows from gold funds. This is, contrary to appearances, very good information for those who are counting on an increase in metal prices. In other words, investors who were very impatient sold what they had sold and may no longer be at a supply side, which may open the way for a rise. A similar situation may occur in the silver market, which also seems to be turning back after the last correction. In the context of gold, which may be a protection against inflation among investors, it is worth noting that inflation expectations in the USA have risen to the highest level since May 2020. At the moment, the average inflation within 10 years is expected to exceed 1.83%.
Today it is also worth mentioning the OPEC+ meeting postponed. It is during this meeting that the countries of the alliance have to determine what oil production will look like in 2021, as the current limits apply until the end of 2020. The market consensus assumes that OPEC+ will decide to extend the current limits still for the first quarter of next year so as to only increase production after a possible small third wave of the pandemic in February/March. Then, almost 2 million barrels of oil per day may be released to the market, but at the same time the demand will increase as the restrictions are lifted.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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